By R. Jason Howard, J.D.
The Supreme Court heard oral argument on a writ of certiorari involving a Ninth Circuit holding that Exchange Act Section 14(e) supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer. The petition stresses that the Second, Third, Fifth, Sixth, and Eleventh Circuits all require proof of scienter (Emulex Corp. v. Varjabedian, April 8, 2019).
Oral argument. At oral argument on April 15, 2019, petitioners argued independent reasons for asking the Court to reverse the Ninth Circuit’s decision. The petitioners’ attorney said, “as the government itself recognizes, this Court's precedents compel the conclusion that Section 14(e) does not confer any implied private right at all.”
Several Justices jumped on this argument, questioning the timing of the issue and asking whether the Court was rewarding the petitioners for not raising the issue adequately below, and in quoting counsel’s argument in the lower court where he said that his clients did not dispute that Section 14(e) provides for a private right of action.
In concluding, the petitioners’ attorney stated that “when it comes into policies of negligence versus scienter, there should be a real concern on the part of this Court that interpreting Section 14(e) to go all the way to negligence, which would be unprecedented in the 50-year history here, would result in the dumping of information, would be—ultimately be counterproductive.”
Representing the U.S. government as amicus curiae in support of neither party, Morgan L. Ratner opened his argument by saying that “Section 14(e) does cover negligent misrepresentations, but it does not authorize private enforcement.” Justice Sotomayor then asked that since “14(e) borrows the language of 10-5, and we have all along interpreted 10b-5 to require scienter, why shouldn't we require the same standard here?”
Justice Alito then reverted back to the initial question, asking the government attorney to explain why he thinks it’s appropriate for the Court to reach the question whether there’s a private right of action in light of the concern as to whether the claim was properly before the Court. In response, he explained that it is proper to consider based on “three circumstances.”
The first, he argued, was that the issue had now been “fully briefed and aired.” The second was that the issue “really is an antecedent question to the scope of Section 14(e).” Finally, he argued that the third and most dispositive reason was that the Court found, in a prior case under identical circumstances, that it was appropriate to consider this question.
The respondents’ counsel then addressed the Court, arguing that the entire dispute could be resolved by “looking to this Court's usual tools of statutory construction and the text, context, purpose, and history of Section 14(e).” As to the issue of the private right of action, the respondents argued that the case presented “the exceptionally rare situation where Congress unmistakably intended this very statute to be privately enforceable, despite not including an express private remedy.” The ultimate question is “what did Congress intend when they used the specific language in 14(e)?” Continuing, he explained that it was the respondents’ contention that “Congress in 1968 expected 14(e) and understood that it would be privately enforceable.”
After having reserved rebuttal time, the petitioners’ attorney explained that “fundamentally, the threshold question in the case is about the role of federal courts when it comes to creating implied private rights,” arguing that he had heard no answer from the respondents “as to how Section 14(e) actually satisfies the test for creating implied private rights.”
The case is No. 18-459.